Investing in the restaurant industry: Making wise choices

Investing in the restaurant industry: Making wise choices

The restaurant business can be tough. According to Cornell University and the National Restaurant Association 1, 60% of independent restaurants fail within the first three years of operation. Yet people still ponder the idea of investing in their favorite restaurant, and the foodie investor may be drawn to viewing which companies are making inroads on the restaurant exchange traded fund (ETF).

When it comes to investing, the restaurant ETF allows the investor to invest in a number of publicly traded name brands in the restaurant industry. On the other hand, the investor looking for the intimacy of being directly connected and supportive of a smaller restaurant would likely have different goals and risks to evaluate.

The National Restaurant Association also maintains an index tracking the health and outlook for restaurants covering over 380,000 members including food suppliers and distributors, providing an avid follower of this index the consumer spending trends that affect the restaurant industry at any given time2.

The savvy investor knows there is room for both traditional investing, with asset classes such as equities and bonds, as well as ventures off the beaten path that need to be evaluated carefully before leaping in. Being a restaurant investor is a big and often public responsibility with failures and successes noted within a community. For a deeper understanding of the analyses completed by skilled investors, consider the insights recently shared with me by Reed Clemons, a veteran in the Austin, Texas restaurant business who has owned 12 restaurants, including local favorites, The Grove and Lola Savannah:

What should a restaurant owner be looking for in investors?

1. “Any investor putting money into the opening of a restaurant has to be prepared to lose the entire amount and be okay with it. High net-worth investors that are ok with the restaurant business being a high risk investment and can sustain the loss should it happen.”

2. “Investors who buy into my vision as the operator of the establishment and ones that are going to be able to give constructive feedback as needed but let me do what I do best with my team.”

3. “A handful of investors who offer a smart network of neighbors and local businesses that they can bring customers into the business.”

4. “A small group of investors who are neighbors to the restaurant. They are coming in and are the trusted set of extra eyes and ears that an owner and operator needs to have.”

What should investors be looking for in a restaurant owner?

1.“Does the operator have his own skin in the game? For example, I would not invest in a restaurant deal, if the operator did not have at least 10% of his or her own money in the investment pool.”

2.“I warn people not to invest in anyone who hasn’t opened and successfully run a restaurant before. There are many cases when a wealthy individual that has never been in the restaurant business invests in a chef but expects the chef to understand how to run a restaurant for profit. That is a recipe for disaster. That’s why I believe it is always key to have an operator — someone who knows the business, has and can do every role in that restaurant including being the chef. This way the investors know that you’re running a business with a goal of being a visible success but also a profitable success.”

3. “Perhaps this is obvious, but be sure that you are investing in someone who has a good track record in making a vision come true.”

What valuable lessons have you learned during your career in the restaurant business?

“Early in my career, I learned the hard way by having too many concepts going at the same time. I use to try to do everything myself — now I have a operating partners in the General Partnership. It is a tremendous help to have partners in the Grove. We are able to utilize each other strengths and work together to move the concept forward. Don’t let a chef have too much control of the business decisions. Too many times I a have seen a chef’s agenda not be in the best interest of the restaurant. To maintain long time success in a restaurant, it is all about the details… every day, every plate every customer.”

Is there any rhyme or reason as to why some restaurants soar and others fail?

“What I know from experience is that good operators have a much higher chance of success. The operator needs to have an original concept that is current and fits a niche. He or she needs to know the demographic and not just try to target a sliver of it if they want their tables filled each night. The food, the atmosphere and the right location need to be spot on. The operator needs to be someone who tries all the restaurants in town, travels and has a true finger on the pulse of what will work.”

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David Osborne is the founder of Osborne Advisors, an independent private wealth management firm offering wealth management to high net worth individuals, families, estates and corporations since 1999. An extension of Osborne Advisors, Osborne Advisors Pro, is a sports wealth management offering created solely to focus on the unique financial management needs of professional athletes and coaches.

Exchange traded funds (ETFs) are investment companies sold only by a prospectus; investors should consider the investment objectives, risks, charges, and expenses of the investment company carefully before investing. The prospectus, which contains this and other information about an investment company, can be obtained from the investment company or your financial professional. Investors should read the prospectus carefully before investing.

This article was written and prepared by Red Fan Communications (Austin, TX, 512 551-9253) and David Osborne. David Osborne is a registered representative and registered investment adviser representative of SWS Financial Services, Inc., a member of FINRA and SIPC and a registered broker dealer and registered investment adviser who does not provide tax or legal advice, located at 1201 Elm Street, Suite 3500, Dallas, TX 75270, 214.859.1800. Though information provided in this article was prepared by sources believed reliable, SWS Financial Services, Inc. does not guarantee its accuracy or its completeness. This article may not be duplicated or redistributed without the prior consent of SWS Financial Services, Inc. Red Fan Communications is unaffiliated with SWS Financial Services, Inc.

2 The National Restaurant Association's Restaurant Performance Index (RPI) is a monthly composite index tracking performance and outlook for the U.S. restaurant industry and is released on the last business day of each month